One year after CEO James Gosa first promised to refocus cabinetmaker American Woodmark (NASDAQ:AMWD) not just on making sales, but on making profitable sales, the firm's turnaround continues apace.

That's the message this Fool gets from the firm's fiscal Q2 2007 earnings report, released last week. And that's the message Mr. Market seems to have received as well. In the hours after the news broke, Woodmark gained nearly 2% in market cap; over the succeeding week, it added 2% more.

Reporting a 2% sales decline (when 4% had been expected) and profits that fell short of estimates by just one penny, Gosa drew investors' attention to two trends: rising sales of products for use in remodeling existing homes, and falling sales in the construction market. The former were up by a "double-digit" percentage, while the latter saw a decline in the "high single digits."

None of this will come as a surprise to investors in homebuilders like Centex (NYSE:CTX), Pulte (NYSE:PHM), or Ryland (NYSE:RYL), as each of them saw declining year-over-year sales last quarter. But Gosa's observation does raise an interesting aspect of the troubled housing market: If new homes aren't selling, but people still want to live in nice houses, it's only logical that they'd be paying up to remodel the homes they've already got.

What else is going on at Woodmark? Well, in evidence of the progress of the turnaround that began last year (and is expected to conclude by April 2007), Gosa noted that the firm's quarterly gross margins shot up a good 460 basis points in comparison to last year's fiscal Q2. Not quite as good as the 480-point differential revealed in the year-to-date results, but impressive nonetheless. And it's a nice counterpoint to the continual reports of declining sales -- the company may be selling less stuff, but the stuff it does sell is bringing higher profits.

Also nice to see is that these aren't just "accounting profits," but profits you can count in cold, hard cash. The company has generated $42 million worth of free cash flow year to date, in fact, or more than triple what the firm brought in through the first half of the last fiscal year. Credit Woodmark for good management of its working capital here, as it sold down its inventories by a good 14% over the past year, converting goods into cash and swelling its coffers by $30.7 million.

All in all, it's been a very good start to the 2007 fiscal year, instilling confidence that the firm can meet its goal of completing the turnaround by fiscal year-end.

We've been watching American Woodmark's impressive turnaround for some months now. Follow along in:

Want some help remodeling your portfolio? Whatever your investing style, the Fool has a newsletter (and a 30-day free trial) for you.

Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy comes in oak or mahogany.